Discount Mortgages
A discount mortgage is where the lender agrees to give you a discount on their standard variable rate, for a set period of time. As with a standard variable rate mortgage, your monthly mortgage repayments will move up and down in accordance with the base rate but you will benefit from paying a reduced rate.
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As an example, if the standard variable rate is 6.5% with a discount of 1.5%, you will pay 5%. If the variable rate rose to 7%, then the rate you will pay will be 5.5%.
The discount may be calculated by taking into consideration a number of factors, such as the size of your loan and the amount you borrow in relation to the value of your home.
A discounted mortgage may be suitable for someone who wants to keeping their initial mortgage payments as low as possible and the discount period can help them achieve this. How they work is that you can get a discount rate mortgage lasting from just six months up to normally around five years. Typically, the shorter the discount period, the better the discounted rate will be.
Lenders offer these discounts to attract your custom – and once they have you as a customer, some may charge heavy redemption penalties should you try to switch to another provider once your discounted period is over.
By adding these early redemption penalty clauses (ERC) to your agreement, it means that you are tied to the provider for a certain period of time and it would not be viable for you to change to another mortgage lender.
However, discount mortgages are a popular choice - who wouldn’t want to pay less interest on their mortgage? If you decide to choose a discount mortgage, then do check the redemption penalties for changing mortgage after your discounted period has ended. If, at the end of the discounted period, you do not move your mortgage, the interest rate will normally revert to a standard variable rate type.
Naturally, this rate will be higher than the discounted rate you will have been paying which means your monthly mortgage repayments will increase. They may vary over the remaining term of your mortgage as well as rates increase and decrease.
Remember, that larger your mortgage discount is, the higher the amount your repayments will be when your discounted period ends. So you must allow for this in your budget – if you forget, you could find yourself going overdrawn on your bank account.
